International Financial Reporting Standards_guide.pdf

Chapter 38 Insurance Contracts (IFRS 4) 425
EXAMPLE 38.4
(iii) Management of insurance risks —life assurance
The table below summarises the variety of risks to which the Group’s life assurance operations are
exposed, and the methods by which the Group seeks to mitigate these risks.
Risk Definition Risk management
Underwriting
HIV/AIDS
Medical
developments
Changing
financial
market
conditions
Policyholder
behaviour
Catastrophe
Policy lapse
Misalignment of policyholders to the
appropriate pricing basis or impact of
anti-selection, resulting in a loss
Impact of HIV/AIDS on mortality rates and
critical illness cover
Possible increase in annuity costs due to
policyholders living longer
Lower swap curves and higher volatilities
cause investment guarantee reserves to
increase
Selection of more expensive options,
or lapse and re-entry when premium
rates are falling, or termination of policy,
which may cause the sale of assets at
inopportune times
Natural and non-natural disasters,
including war/terrorism, could result in
increased mortality risk and payouts on
policies
A policyholder option to terminate the
policy, which may cause the sale of assets
at inopportune times. This creates the risk
of capital losses and/or reinvestment risk
if market yields have decreased
Experience is closely monitored. For
universal life business, mortality rates
can be reset. Underwriting limits, health
requirements, spread of risks and training
of underwriters all mitigate the risk
Impact of HIV/AIDS is mitigated wherever
possible by writing products that allow
for repricing on a regular basis or are
priced to allow for the expected effects of
HIV/AIDS. Tests for HIV/AIDS and other
tests for lives insured above certain values
are conducted. A negative test result is a
pre requisite for acceptance at standard
rates
For non-profit annuities, improvements
to mortality are allowed for in pricing
and valuation. Experience is closely
monitored. For with-profit annuity
business, the mortality risk is carried by
policyholders and any mortality profit or
loss is reflected in the bonuses declared
A discretionary margin is added to the
value of guarantees, determined on a
market-consistent stochastic basis and
included in current reserves. A partial
hedge is in place (South Africa). Fewer
and lower guarantees are typically
provided on new business (South Africa).
Certain guarantees are reinsured (United
States)
Experience is closely monitored, and
policyholder behaviour is allowed for in
pricing and valuation
Catastrophe stop loss/excess of loss
reinsurance treaty in place which covers
claims from one incident occurring within
a specified period between a range of
specified limits
Experience is closely monitored, and
policyholder behaviour is allowed for in
pricing and valuation
(continued)